The Dow Jones Industrial Average climbed over 200 points Tuesday on renewed optimism that a permanent trade deal between the United States and China was progressing based on a Bloomberg report that China would slash the current 15 percent tariff on cars to 40 percent.
Based on the report, the proposal to pare down the tariff would be reviewed by the Chinese Cabinet in the coming days, but it has yet to be finalized and is subject to change. Nonetheless, the news was interpreted by the capital markets that talks between the two economic superpowers are progressing.
In addition, the news of the tariff cut was paired with U.S. President Donald Trump tweeting that talks with China are moving forward.
Very productive conversations going on with China! Watch for some important announcements!
— Donald J. Trump (@realDonaldTrump) December 11, 2018
The major indexes have been racked by volatility in recent sessions as the reality that a tangible and permanent trade deal is necessary has been settling in with investors. The probability of reaching an agreement didn’t improve after news broke that Meng Wanzhou, the CFO of Huawei, one of the world’s largest mobile phone makers, was arrested in Canada and faces extradition to the U.S.
“It is important for the market to get positive headlines at this time,” said Quincy Krosby, chief market strategist at Prudential Financial. “This is sustainable if we don’t hear a contradiction. This has been part of the problem. The algorithms work instantaneously and if we get someone with an opposing view we could turn around.”
Last week, the capital markets breathed a sigh of relief as President Trump and Chinese president Xi Jinping agreed to cease fire on their tariff-for-tariff battle, giving the markets hope that a year-end rally could ensue.
However, the market boost was short-lived as the truce didn’t quell investor fears as markets fretted on the notion that a trade deal can only materialize after lengthy discussions between the two economic superpowers. Furthermore, contentious topics like forced technology transfer and intellectual property could derail negotiations.
Trump and Jinping met at the G-20 Summit in Buenos Aires, putting global markets on pause as the two economic superpowers met to hopefully ameliorate their trade differences. As part of the agreement, both nations agreed to withhold imposing further tariffs on each other for 90 days while they work out a firm, ironclad deal.
The U.S. agreed to keep the current 10% tariffs on over $200 billion worth of Chinese goods while an agreement is negotiated, but will increase to 25% if no agreement is reached prior to the 90-day deadline.
“There are two major factors here: a new level of trade talks is under way, and the number of bearish market calls got significantly higher,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “That usually signals the end to an ongoing sell-off. I think this rally could go on through the end of the year.”
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